Capital Budgeting

| December 2, 2017

Proposal A: New Factory
A company wants to build a new factory for
increased capacity. Using the net present value (NPV) method of capital
budgeting, determine the proposal’s appropriateness and economic viability with
the following information:

• Building
a new factory will increase capacity by 30%.
• The
current capacity is $10 million of sales with a 5% profit margin.
• The
factory costs $10 million to build.
• The
new capacity will meet the company’s needs for 10 years.
• The
factory is worth $14 million over 10 years. Using net present value, determine
the proposal’s appropriateness and economic viability.
Prepare a 500-word report explaining your
calculations and conclusions. Answer the following in your report:

• Explain
the effect of a higher or lower cost of capital on a firm’s long-term financial
decisions.
• Analyze
the use of capital budgeting techniques in strategic financial management.

Format your report consistent with APA
guidelines.

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